Overall, July data continued to disappoint market observers hoping for signs of a strengthening in the second half of the year. Even investment growth leveled off, although the upward trend remains intact. Headline fixed asset investment (FAI) increased 20.4 percent y-o-y, about six basis points down from the growth rate in June.

It’s becoming increasingly evident that government-led investment, and specifically more infrastructure development, may be the only source of a rebound this year, as other domestic indicators continue to show softness.

Consumer price inflation slowed once again to 1.8 percent y-o-y, although non-food inflation actually accelerated slightly, to 1.5 percent y-o-y from 1.4 percent in June. Food inflation dropped to 2.4 percent from 3.8 percent in June. However, producer prices are beginning to give cause for concern, as deflationary pressures in the industrial sector appear to be mounting.

Loan growth disappointed somewhat in July, with new credit extension by banks registering 540 billion RMB for the month compared to expectations of about 600 billion RMB, and compared to new loans of 920 billion RMB in June. More worrisome than the overall slowdown in loan growth (which was largely expected), long-term bank borrowing by corporates continued to slump, constituting only 17 percent of new loan issuance in July, down from 17.7 percent in June, a substantial show of weakness in the corporate sector.

New corporate bond issuance jumped significantly in July to 249 billion RMB for the month, up from 198 billion in June, and was thus equal to almost half of the total new bank loans for the month. However, this doesn’t mean that funding demand is returning from the manufacturing sector. Rather, the bond uptick was likely driven by local government vehicles tapping into bond markets to finance new stimulus packages.

Export growth came in at a dismal 1 percent growth rate y-o-y in July, with across the board weakness in emerging and developed countries alike. Import growth slowed as well in July, but came in stronger than exports by expanding 5.7 percent y-o-y.

The expected growth rebound on increased investment activity has yet to materialize. It may be some months yet before policy measures fully filter into the real economy; and the authorities appear inclined to “wait and see”.

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